1. Juicy Energy Industries develops and produces biomass, an alternative energy source. The company has an outstanding $10,000,000, 30-year, 10% bond issue dated July 1, 2007. The bond issue is due June 30, 2037. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date.
The bond indenture requires a bond sinking fund, which has a balance of $1,200,000 as of July 1, 2012. The company is currently experiencing a shortage of funds due to a recent acquisition. Dillip Fogel, the company's treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Dillip's brother-in-law, a trustee in a sinking fund, has indicated willingness to allow Dillip to use the funds from the sinking fund to temporarily meet the company's cash needs.
Discuss whether Dillip's proposal is appropriate.
2. Financial Assets include stocks and bonds. These are fairly simple securities that can often be valued using quoted market prices. However, Wall Street has created many complex and exotic securities that do not have quoted market prices. These complex securities must still be valued on the balance sheet at fair value. Generally accepted accounting principles require that the reporting entity use assumptions in valuing investments when market prices or critical valuation inputs are unobservable. What are the ethical considerations in making subjective valuations of complex and exotic investments?